Lawrence Summers withdrew his bid to be the next Federal Reserve chairman, and America and Russia agreed on a plan to remove Syria’s chemical weapons. Industrial production rose in August by the most in six months. The U.S. central bank will reduce its $85 billion in monthly bond-buying by $10 billion this week, according to the median forecast of economists in a Bloomberg News survey.
Equities: The DEC13 E-mini S&P 500 (CME:ESZ13) gapped higher after the weekend’s main event of Larry Summers taking himself out of the running to be the next U.S. Fed chairman. Markets interpreted this event as bullish because Summers was seen to be the most hawkish potential Fed chair of the known nominees. This contract broke through previous yearly highs of 1698, and traded up to 1703.75. Now, it is up 13.75 points to 1695.75. The strong economic data pattern overall seems to be supporting the equity markets, and the Summers withdrawal was really a tremendous boost in our opinion. We believe that if the tapering is indeed announced on Wednesday, it will be at $10 billion or less. If it comes in less, we believe the S&P 500 will rally further, but will also be paying very close attention to the Fed’s forward guidance. The tapering factor is certainly not the only key element of Wednesday’s announcement. Overall, this year the stock market has rewarded investors who have chosen to stay long and not get out at perceived short-term tops.
Bonds: The DEC13 U.S. 30-year bond market (CBOT:ZBZ13) is up 1’09 points this morning, based mainly on the Summers weekend announcement. Again, this was also fuel for bond bulls because Summers was a hawk and now that he is out of the running, the market looks like it is thinking the next Fed chairperson will be likely Janet Yellen, who is famously dovish. The bonds have rallied to our first key level at 131’03, and we would not be surprised to see another leg higher, but the momentum might slow down until we hear what the Fed says on Wednesday.
Commodities: DEC13 gold (COMEX:GCZ13) got an initial boost from the Summers announcement, and is up $10 on the day to $1,318. Gold could not breach our key support level at $1,300, and now could rally back to its next resistance level of $1,336. Overall, we believe gold is in a bearish environment. Over the next year, we would not be surprised to see gold test the $1,200 level. OCT13 WTI crude oil (NYMEX:CLV13) is sticking with its theme of enhanced volatility, and this morning rallied up to $108, but is now down$1.30 to $106.91. $107.36 is our key pivot level, and if crude stays below there, we would not be surprised to see a test of the recent low of $104. Overall, however, we believe the trend is still overall bullish.
Currencies: The major foreign currencies gapped higher this morning on the Summers announcement, as the DEC13 U.S. Dollar Index (NYBOT:DXZ13) gapped lower, and is now trading down 35 ticks to 81.28. The DEC13 Aussie was the big winner overnight, trading up 99 ticks now to 92.94. We would not be surprised to see some consolidation in the Aussie in the short term as it has had a very nice rally recently. The DEC13 euro futures (CME:ECZ13) are up 51 ticks to 1.3361. We believe this contract is headed toward its key resistance level of 1.34, and will potentially break out above there. The next key resistance is 1.3458. We believe the euro could keep its upward momentum over the next several months and ultimately head to our next key target of 1.37.